As the weather situation has eased, IHS Markit has this overview what this natural disaster can mean to the automotive industry.

Overall, the impact of Hurricane Harvey is heavily localized to the Houston, Texas, area and the sales in that region, as the area is not home to a significant amount of automotive production. There will, however, be an impact on August sales that could extend into September sales. Later in the year, however, the lost sales are expected to be recovered. IHS Markit forecasts silver lining of opportunity for increased service revenue and a potential sales bump in the late third and fourth quarter 2017 for area dealerships.

In terms of automotive production, there has been little impact. GM and Toyota plants did not lose production capability. Regarding the issue of replenishing vehicles in inventory, IHS Markit does not currently project any increases in production in the immediate term. The expected solution will be for dealers to work together to move inventory as needed.

Economic Impact

IHS Markit has also made an early assessment of the economic impact. Tropical Storm Harvey began as a hurricane and is continuing to cause epic flooding in Houston and along the Gulf Coast. While it is too early to fully assess the damage, the cost of the storm is now estimated between $60 billion and $80 billion. Damaged housing, buildings, and infrastructure, along with evacuations and business disruptions will take a huge toll on affected areas. The energy and chemicals sectors are a major concern along both the Texas and Louisiana coasts, and these industries are expected to impact on the global economy noticeably. Given what we know now, IHS Markit expects that real GDP growth in the third quarter—recently estimated at 3.5%—will be cut by 0.5 to 0.6 percentage points due to lost production during the storm and recovery. Fourth-quarter growth—previously estimated at around 2.4%—will likely be raised by a few tenths of a percentage point to capture rebuilding activity and spending fueled by insurance payouts.

According to IHS Markit analyst Peter Nagle, “In the short term, Hurricane Harvey will obviously have major impacts especially on gasoline prices, but crude oil production outages are already being restored and the refinery and port closures – although major – will likely fully be re-opened in a matter of weeks and not months, barring unforeseen surprises.”

Sales and Dealership Impacts

IHS Markit forecast analyst Chris Hopson expects that the sales lost over the final days of August 2017 will affect sales by anywhere from 10,000 to 25,000 units between 25 August and 31 August, enough to knock the seasonally adjusted sales rate anywhere from 100,000 to 300,000 units from what it would have been, on an adjusted basis and estimates August SAAR to come in about 16.3 million units. Hopson notes, “The silver lining lies in the damaged vehicles needing to be replaced, which can provide a temporary lift to new vehicle sales in the affected area.”

Hopson says the short-term disruption of sales will begin to be made up roughly 60 to 90 days after the event—or as soon as the insurance checks start arriving. If the reaction from insurance agencies—which enables consumers to replace lost vehicles—is swift, replacement demand could provide a boost to light vehicle sales beginning in fourth quarter 2017.

The Houston DMA, according to IHS Markit registration data, is the tenth largest in the US (January to June 2017), with about 184,000 new vehicles registered and a 2.2% share of total US light-vehicle registrations so far this year. Houston is also a large pickup truck market, the third largest in the US over the same time period, behind only Dallas/Fort Worth, Texas, and Tulsa, Oklahoma. The Houston DMA accounted for 3.3% of total US registrations of non-luxury full-size pickup trucks, about 37,000 units over the first six months of 2017. Additionally, the US domestic automakers account for about 50% market share in the Houston DMA, compared with 44% nationally.

Given these factors, FCA, Ford and GM may see a stronger negative impact on August sales from the storm than other automakers. However, full-size pickups also currently account for 20% of sales in the Houston area, compared with 16% nationally, which is likely to lend to improved sales for these automakers in the fourth quarter of 2017.

Production Implications

There are two automotive manufacturing plants in Texas. GM’s Arlington facility builds the company’s full-size SUVs (Chevrolet Tahoe/Suburban, GMC Yukon/Yukon XL and Cadillac Escalade/Escalade ESV), while Toyota’s San Antonio plant builds its Tundra and Tacoma. Neither of the plants were affected by the storm itself, and IHS Markit is not aware of any production disruptions as a result of the storm.

However, there is also the issue of the loss of in-stock inventory, those vehicles on dealer lots that are damaged or totaled. The number of vehicles in this category is still being evaluated. While this may strain some inventory in the Houston area in the near term, IHS Markit production analyst Joe Langley is not expecting automakers to suddenly or dramatically increase output for the time being.  “In many cases, automakers can reallocate volume to the Houston area rather than have it pile up in other markets that are well stocked.” As it will also take some time for the sales demand in Houston to rebound, IHS Markit expects to see dealers work together to move inventory as needed, likely with some support from OEMs as well, rather than move to increasing production.

IHS Markit analysts across all of our business areas are continuing to monitor the situation and may issue additional updates as necessary in the coming days/weeks.

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